OVERCOMING FINANCIAL FRICTIONS WITH THE FRIEDMAN RULE

Sergio Salas

Macroeconomic Dynamics, 2018, vol. 22, issue 8, 2141-2181

Abstract: A general equilibrium model with financial frictions in which individuals may encounter unobservable investment opportunities is developed along the lines of Kiyotaki and Moore (2012). I study efficiency properties induced by money and monetary policy when financial frictions prevent optimal equilibrium allocations. By providing closed-form solutions to all prices, allocations, welfare, and, especially, the distribution of individuals with respect to assets, I show that the Friedman rule achieves maximal social welfare, independent of how tight the financial constraints may be. The same level of welfare would be induced by an omniscient central planner able to verify who has an investment opportunity.

Date: 2018
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